Nonlinearities and expenditure multipliers in the Eurozone.

Nonlinearities and expenditure multipliers in the Eurozone.

Journal article

0960-6491 (Print) 1464-3650 (Online)

We analyze the nonlinear effects of government spending in the Euro area, by using the local projection method and by testing whether the impact of the shock depends crucially on the depth of the recession, on some structural characteristics of the Eurozone (EZ) economies, and on the monetary policy stance. We provide four insights. First, expenditure multipliers in the Euro area are not significantly higher in recessions than in expansions. However they are always above unity. Second, state dependency emerges as soon as deep recession is distinguished from ordinary downturns. Third, structural characteristics, such as the presence of automatic stabilizers, the exchange rate regime, the degree of labor market flexibility, and initial conditions, such as the debt/gross domestic product ratio, do influence the size of expenditure multipliers in the EZ. Fourth, multipliers are much higher when the policy interest rate is at the zero lower bound.

Industrial and Corporate Change INCC 2022, 31(2), 552–575

Oxford, UK : Oxford University Press, 2022.

eng

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